The Anatomy of a Good Trade.
Recently a student asked me what a “good trade” was. You would think that the answer would be simple. Profitable, right? Well, profitable may not always be the answer
and is not necessarily always true. You see, sometimes we enter trades that go against us and we get stopped out. If we get stopped out, does that mean it was a bad trade? As long as we make calculated stops and follow our trading plan then I say no, it’s not a bad trade. In fact, it’s a good trade.
There are a number of key components that go into a good trade. Ultimately, we all want to profit but at the end of the day but that’s not always the reality. There have been plenty of times I've done all my pre-trade research and waited on a great setup only to get filled and washed out of my trade. It happens. It’s part of the business of trading.
It’s important to understand and remember that as long as you’re following your system (risk management included) even if you’re stopped out, it can be categorized as a good trade. If you put on a position and get hit with a 2% stop that means you’ve saved 98% of you trading capital. That sounds like a good trade to me! Remember that the at risk capital you put up, the 2%, is what you pay to see if your trade analysis is correct and plays out.
Now that we all understand that not all good trades are winners, we can really focus on the key components to a solid day trade. I couldn’t comfortably glaze over losses like they don’t exist because as we all know, they most certainly do.
Now, onto the real meat of what a good trade is. In a perfect world ALL your trades are going to be good. Regrettably this is not a perfect world. Having said that, as long as your risk reward ratio is 1:3 (1 cent of risk to 3 cents of reward) or better you only have to be right 50% of the time to do very well for yourself. For me personally I err on the 55-65% success ratio side, not the best but sustainable. With that the type of trading I do allows for very little risk and MASSIVE potential upside. Most people that are familiar with me and J. Lewis Trading know we trade small caps with low floats. It’s the volatility we’re looking for that shows up in those small cap, low float stocks that we trade. You’ll never see an large cap move 50-200% intraday. They’re perfect for smaller accounts that are looking for abnormal growth.
When planning a good trade you have to follow a regimented system. This means you have to adhere to the same process day in and day out. With that, you’ll become a specialist of sorts. For me, my routine is the same every morning. I’m typically in front of my computers an hour before the market opens to develop my watchlist. I check my scanner for movers based on a proprietary system I’ve created, and I hone in on a few stocks that have potential. From there, I cross reference the stocks I’m seeing with any news. That’s it! Of course it’s a little more detailed than that, but generally speaking that’s my morning routine.
Once the market opens I’ll have a short list of stocks that I’m interested in possibly trading. I NEED to see very specific things in order to take a stock long. Once I’ve caught a glimpse of price creating my set up I refer to my LVL2 and DOM to see where the actual market is. From there, I wait. I wait for the market to come to me, this takes discipline. I don’t chase positions. While I’m waiting I am also watching 3-6 other possible trades that ALL have potential. Once I’m triggered in, I follow a risk management model. That is the deal front to back.
Now to summarize the anatomy of a good trade; it has a good risk:reward ratio, follows a specific system tailored to the type of trading you do, and finally the discipline to wait for the market to do what you need it to in order to enter. At the end of the day, if I do all of that and get stopped out, so be it. It was still a good trade because I know that if my trade does hit, it’s going to be a monster! Although im looking at a base 1:3 risk vs reward, it’s not uncommon to put on 3-5 cents of risk and see 20-30 cents of reward! Those types of trades present themselves daily based on our scans. So whether you’re stopped out or you sell out in profit is truly irrelevant. All that’s important is that you FOLLOW YOUR PROVEN SYSTEM! This is especially important when you’re going through a rough patch. As most people will bail on a tested and sound strategy when the market/trading record is weak. Stick to a proven system through good and bad, thick and thin.
Understand that ALL vet traders go on winning AND losing streaks but at the end of the day you can still be in the green if you follow a proven system. If you are among the masses that need a strategy or are looking to simply tighten up on your trading feel free to reach out to the team. We’re in the business of getting traders profitable. All of these points are taught in detail in our Mentoring Program, Day and Swing Trading Bootcamps, as well as our brand new Master Trading Class!